Higher One Inc v. Touchnet Info Sys Inc

Filing 93

ORDER: Renewed Motion to Dismiss Its Complaint and Defendant's Declaratory Judgment Counterclaims, and for Leave to Amend Its Answer to Remaining Counterclaims (Doc. No. 82 ) is hereby GRANTED in part and DENIED in part. The plaintiff's C omplaint is hereby dismissed without prejudice under Rule 41(a)(2). The plaintiff's motion to dismiss the defendant's declaratory judgment counterclaims (Counts IV-VI) is denied. The plaintiff shall file an amended answer to include a request for declaratory judgments that the allegations of Counts I-III and VII-VIII are false and a request for attorney's fees within 21 days. It is so ordered. Signed by Judge Alvin W. Thompson on 9/26/2014. (Wang, M.)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
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:
HIGHER ONE, INC.,
:
:
Plaintiff,
:
:
v.
:
:
TOUCHNET INFORMATION SYSTEMS, INC.,:
:
Defendant.
:
:
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Civil No. 3:10CV1435(AWT)

RULING ON RENEWED MOTION TO DISMISS COMPLAINT AND
DEFENDANT’S DECLARATORY JUDGMENT COUNTERCLAIMS,
AND FOR LEAVE TO AMEND ANSWER TO REMAINING COUNTERCLAIMS
Plaintiff Higher One, Inc. (“HOI”) brings this action
against TouchNet Information Systems, Inc. (“TN”) alleging
infringement of HOI‟s U.S. Patent No. 7,792,744 patent (the
“‟744 patent”).

TN‟s answer includes eight counterclaims, which

fall into two categories: patent-based declaratory judgment
counterclaims (Counts IV, V, and VI), and counterclaims for
antitrust violations and unfair competition related to the ‟744
patent (Counts I-III and VII-VIII).

The plaintiff moves under

Federal Rule of Civil Procedure 41(a)(2) to voluntarily dismiss
the Complaint and moves under Federal Rule of Civil Procedure
12(b)(1) to dismiss TN‟s declaratory judgment counterclaims
(Counts IV, V, and VI).

The plaintiff further seeks leave to

amend its answer to TN‟s remaining counterclaims (Counts I-III

1

and VII-VIII) “to include requests for declaratory judgments
that the allegations of each remaining counterclaim are false.”
(Renewed Motion to Dismiss Its Complaint and Defendant‟s
Declaratory Judgment Counterclaims, and for Leave to Amend its
Answer to Remaining Counterclaims, Doc. No. 82, at 1.)

For the

reasons set forth below, the motion is being granted in part and
denied in part.
I.

BACKGROUND
This is one of two patent infringement actions HOI has

filed against TN.

On February 27, 2009, HOI filed an action

against TN alleging infringement of U.S. Patent No. 7,496,536.
On September 8, 2010, HOI filed this case against TN alleging
infringement of the ‟744 patent.

In July 2011, the court stayed

the two actions to facilitate settlement negotiations.

The stay

was lifted in March 2012 without a settlement in either action.
On May 2, 2012, HOI‟s counsel wrote to TN‟s counsel informing
them that HOI had decided to provide TN with a covenant not to
sue on the ‟744 patent. The covenant correspondence stated:
Our, client, Higher One Inc. (“HOI”), has decided to
withdraw its claim for patent infringement of the ‟744
patent (CVA 3:10-cv-01435(AWT)) against your TouchNet.
Specifically, HOI will not sue TouchNet for patent
infringement as to any claim of U.S. Patent No.
7,792,744 based on products currently manufactured and
sold by TouchNet.
Please let me know whether your client is willing to
join with HOI and voluntarily dismiss CVA 3:10-cv2

01435 (AWT) with Prejudice. Thank you.
(Higher One Inc.‟s Memorandum of Law (“HOI‟s Mem.”), Doc. No.
82-1, 4-5.)

TN‟s counsel responded that TN would not agree to

voluntarily dismiss any of TN‟s counterclaims.
HOI filed an initial motion to dismiss.

On May 18, 2012,

In opposition to the

motion, TN submitted an affidavit by its President, Daniel
Toughey, stating that a new product launch was imminent and TN
feared that HOI would bring an action against the new product.
HOI subsequently withdrew that motion to dismiss.
HOI again offered TN a covenant not to sue.

In June 2013,

Finally, on

November 26, 2013, HOI sent TN, in an e-mail, the following
covenant not to sue:
Our client, Higher One Inc. (“HOI”), has decided to
withdraw its claim for infringement of the ‟744 patent
(CVA 3:10-cv-1435(AWT)) against TouchNet.
Specifically, HOI will not sue TouchNet for patent
infringement as to any claim of U.S. Patent No.
7,792,744 based on any products currently manufactured
and sold by TouchNet.
(HOI‟s Reply, Exhibit 1, Doc. No. 85-1.)1
II.

LEGAL STANDARD
A. Federal Rule of Civil Procedure 41(a)(2)
Rule 41(a)(2) provides, in relevant part:
[A]an action may be dismissed at the plaintiff‟s
request only by court order, on terms that the court
considers proper.
If a defendant has pleaded a

1

It appears that the November 26, 2013 covenant not to sue did not indicate,
as the May 2, 2012 covenant did, that HOI would be voluntarily dismissing
this action with prejudice.

3

counterclaim before being served with the plaintiff's
motion to dismiss, the action may be dismissed over
the defendant's objection only if the counterclaim can
remain pending for independent adjudication. Unless
the order states otherwise, a dismissal under this
paragraph (2) is without prejudice.
Fed. R. Civ. P. 41(a)(2).

“When deciding issues in a

patent case, a district court applies the law of the circuit in
which it sits to nonpatent issues and the law of the Federal
Circuit to issues of substantive patent law.”

Astra Aktiebolag

v. Andrx Pharm., 222 F. Supp. 2d 423, 486 (S.D.N.Y. 2002); see
Andersen Corp. v. Pella Corp., 300 Fed. Appx. 893, 900 (Fed.
Cir. Nov. 19, 2008) (“Because dismissal with or without
prejudice is a question of procedure, we apply the law of the
regional circuit.”).
“Rule 41(a)(2) dismissals are at the district court‟s
discretion . . . .”

D‟Alto v. Dahon California, Inc., 100 F.3d

281, 283 (2d Cir. 1996).

“A voluntary dismissal without

prejudice under Rule 41(a)(2) will be allowed „if the defendant
will not be prejudiced thereby.‟”

Id. (quoting Wakefield v. N.

Telecom Inc., 769 F.2d 109, 114 (2d Cir. 1985)).
“Two lines of authority have developed with respect to the
circumstances under which a dismissal without prejudice might be
improper.”

Camilli v. Grimes, 436 F.3d 120, 123 (2d Cir. 2006).

The first line of authority “indicates that such a dismissal
would be improper if the defendant would suffer some plain legal

4

prejudice other than the mere prospect of a second lawsuit.”
Camilli, 436 F.3d at 123 (quoting Cone v. West Virginia Pulp &
Paper Co., 330 U.S. 212, 217 (1947)) (internal quotation marks
omitted).

“Plain legal prejudice” has been defined to include

“the plight of a defendant who is ready to pursue a claim
against the plaintiff in the same action that the plaintiff is
seeking to have dismissed.”
in original).

Camilli, 436 F.3d at 124 (emphasis

For example, when “the cause has proceeded so far

that the defendant is in a position to demand on the pleadings
an opportunity to seek affirmative relief and he would be
prejudiced by being remitted to a separate action.”

Id.

The second line of authority “indicates that the test for
dismissal without prejudice involves consideration of various
factors, known as the Zagano factors.”
123).

Camilli, 436 F.3d at

The Zagano factors include: “the plaintiff‟s diligence in

bringing the motion; any „undue vexatiousness‟ on plaintiff‟s
part; the extent to which the suit has progressed, including the
defendant‟s effort and expense in preparation for trial; the
duplicative expense of relitigation; and the adequacy of
plaintiff‟s explanation for the need to dismiss.”
Fordham Univ., 900 F.2d 12, 14 (2d Cir. 1990).

Zagano v.

“These factors

are not necessarily exhaustive and no one of them, singly or in
combination with another, is dispositive.”
F.3d 224, 230 (2d Cir. 2011).
5

Kwan v. Schlein, 634

In addition, “a district judge may convert a dismissal
sought to be entered without prejudice to one with prejudice.”
Gravatt v. Columbia Univ., 845 F.2d 54, 56 (2d Cir. 1988).
However, “an opportunity to withdraw a motion for dismissal
without prejudice must be afforded a plaintiff before the
dismissal is converted to one with prejudice.”

Id. at 56.

B. Federal Rule of Civil Procedure 12(b)(1)
A claim is properly dismissed for lack of subject matter
jurisdiction under Fed. R. Civ. P. 12(b)(1) when the court lacks
the statutory or constitutional power to adjudicate the claim.
See Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182,
1187 (2d Cir. 1996).

On a Rule 12(b)(1) motion to dismiss, the

party asserting subject matter jurisdiction “bears the burden of
proving subject matter jurisdiction by a preponderance of the
evidence.”

Aurechione v. Schoolman Transp. Sys., Inc., 426 F.3d

635, 638 (2d Cir. 2005).

When reviewing a motion to dismiss for

lack of subject matter jurisdiction, the court may consider
evidence outside the pleadings.

See Makarova v. United States,

201 F.3d 110, 113 (2d Cir. 2000).
C. Motion to Amend
When it no longer has the right to amend it as a matter of
course, “a party may amend its pleading only with the opposing
party‟s written consent or the court‟s leave.
freely give leave when justice so requires.”
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The court should
Fed. R. Civ. P.

15(a)(2).

“In the absence of any apparent or declared reason —

such as undue delay, bad faith or dilatory motive on the part of
the movant, repeated failure to cure deficiencies by amendments
previously allowed, undue prejudice to the opposing party by
virtue of allowance of the amendment, futility of amendment,
etc. — the leave sought should, as the rules require, be „freely
given.‟”

Foman v. Davis, 371 U.S. 178, 182 (1962).

“The Second

Circuit has held that a Rule 15(a) motion should be denied only
for such reasons as undue delay, bad faith, futility of the
amendment, and perhaps most important, the resulting prejudice
to the opposing party.”

Aetna Cas. & Sur. Co. v. Aniero

Concrete Co., Inc., 404 F.3d 566, 603 (2d Cir. 2005).
III. DISCUSSION
A. Renewed Motion to Dismiss the Complaint2
While TN does not object to dismissing the Complaint, TN
contends that the dismissal should be with prejudice.

However,

TN has presented no argument that it would suffer any plain
legal prejudice, or any prejudice, if the Complaint is dismissed
without prejudice.

At this stage of the case TN is not “in a

position to demand on the pleadings an opportunity to seek
affirmative relief[,]” Camilli, 436 F.3d at 124, nor has TN
suggested that a dismissal without prejudice would harm its
2

While HOI‟s motion does not state whether it is seeking a dismissal with
prejudice or without prejudice, the court construes the motion as seeking a
dismissal without prejudice because in HOI‟s reply, it opposes TN‟s position
that the dismissal should be with prejudice.

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counterclaims against HOI or prevent TN from receiving relief to
which TN is entitled.
The Zagano factors also weigh in favor of granting HOI‟s
motion to dismiss the Complaint without prejudice.

With respect

to the first factor, the court finds that the plaintiff has been
sufficiently diligent in seeking withdrawal of the Complaint.
This is HOI‟s second motion to voluntarily dismiss the Complaint
after offering TN a covenant not to sue.

HOI withdrew its first

motion after TN filed an affidavit stating that a new product
launch was imminent.

Eighteen months later, with no new product

having been launched by TN, HOI again offered TN a covenant not
to sue.

When TN responded that it would not withdraw any of its

counterclaims, HOI filed the instant motion.

As to the second

factor, while this is the second patent infringement action HOI
has filed against TN and while both parties‟ counsel have been
zealous advocates, the record does not show that HOI has engaged
in “undue vexatiousness”; the fact that HOI has offered TN a
covenant not to sue on multiple occasions is inconsistent with
such a conclusion.

As to the third factor, although the case

was filed four years ago, since the lifting of the stay there
has been no substantive activity in this case, other than
filings related to the instant motion, since June 2012 when HOI
withdrew its first motion to dismiss.

It appears HOI was

waiting to assess the impact of TN‟s new product launch, and
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neither party was moving this action towards being trial ready.
With respect to the fourth factor, there will be no further
litigation of HOI‟s claims relating to the ‟744 patent to the
extent such claims arise from any TN product currently made,
used, or offered for sale in the United States.

Finally, as to

the fifth factor, the court finds HOI‟s explanation for
dismissing the Complaint adequate.

HOI‟s voluntary dismissal of

the Complaint is rational in light of its covenant not to sue.
Therefore, the Zagano factors weigh in favor of granting HOI‟s
voluntary dismissal without prejudice.
TN asserts that HOI‟s Complaint should be dismissed with
prejudice by virtue of HOI‟s covenant not to sue and cites to
Dodge-Regupole, Inc. v. R.B. Rubber Prod., Inc., 585 F. Supp. 2d
645 (M.D. Pa. 2008) and Cooper Notification, Inc. v. Twitter,
Inc., 545 Fed. Appx. 959 (Fed. Cir. Aug. 30, 2013), for support.
However, Dodge-Regupole and Cooper Notification are
distinguishable because those cases had progressed to a
materially different stage, i.e., beyond the Markman stage.

See

Dodge-Regupole, 585 F. Supp. 2d at 652 (“This case has been
pending for more than two years and nine months, and has
progressed through a Markman hearing and decision and
significant discovery.”); Cooper Notification, 545 Fed. Appx.at
963 (“A few days before dismissing claims 1-11 [with prejudice],
the district court issued its Markman opinion and order . . .
9

.”).

Here, the case is nowhere close to a Markman hearing.

TN

also asserts that HOI has offered no reason why the dismissal
should operate without prejudice.

However, neither Camilli nor

the Zagano factors require HOI to provide such a reason.
Therefore, HOI‟s request for voluntary dismissal without
prejudice is being granted.
B. Motion to Dismiss under Rule 12(b)(1)
HOI also moves to dismiss TN‟s declaratory judgment
counterclaims (Counts IV, V, and VI) under Rule 12(b)(1) on the
ground that HOI‟s covenant not to sue eliminates the court‟s
subject matter jurisdiction over these counterclaims.
Under the Declaratory Judgment Act, “[i]n a case of actual
controversy within its jurisdiction . . . any court of the
United States . . . may declare the rights and other legal
relations of any interested party seeking such declaration . . .
.”

28 U.S.C. § 2201(a).

“[T]he phrase „case of actual

controversy‟ in the Act refers to the type of „Cases‟ and
„Controversies‟ that are justiciable under Article III.”
Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118, 126-27 (2007)
(citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240
(1937)).

“A case becomes moot - and therefore no longer a

„Case‟ or „Controversy‟ for purposes of Article IIII - „when the
issues presented are no longer „live‟ or the parties lack a
legally cognizable interest in the outcome.‟”
10

Already, LLC v.

Nike, Inc., 133 S.Ct. 721, 726 (2013) (quoting Murphy v. Hunt,
455 U.S. 478, 481 (1982)).

“No matter how vehemently the

parties continue to dispute the lawfulness of the conduct that
precipitated the lawsuit, the case is moot if the dispute „is no
longer embedded in any actual controversy about the plaintiffs‟
particular legal rights.‟”

Id. at 727 (quoting Alvarez v.

Smith, 558 U.S. 87, 93 (2009)).
“As the Supreme Court has recognized, a covenant not to sue
a declaratory judgment plaintiff can moot a controversy between
the parties.”

Organic Seed Growers and Trade Ass‟n v. Monsanto

Co., 718 F.3d 1350, 1357 (Fed. Cir. 2013).

“Whether a covenant

not to sue will divest the trial court of jurisdiction depends
on what is covered by the covenant.”

Revolution Eyewear, Inc.

v. Aspex Eyewear, Inc., 556 F.3d 1294, 1297 (Fed. Cir. 2009).
It remains true, however, that “a defendant cannot automatically
moot a case simply by ending its unlawful conduct once sued.”
Already, 133 S.Ct. at 727.

“[O]ur cases have explained that „a

defendant claiming that its voluntary compliance moots a case
bears the formidable burden of showing that it is absolutely
clear the allegedly wrongful behavior could not reasonably be
expected to recur.‟”

Id. (quoting Friends of the Earth, Inc. v.

Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 190
(2000)).

Therefore, as the party attempting to moot its case,

“it [i]s [HOI]‟s burden to show that it „could not reasonably be
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expected‟ to resume its enforcement efforts against [TN].”
(quoting Friends of the Earth, Inc., 528 U.S. at 190).

Id.

“The

burden is not on [TN] to show that a justiciable controversy
remains.”

Id. at 733 (Kennedy, J., concurring).3

“The case is

moot if the court, considering the covenant‟s language and the
plaintiff‟s anticipated future activities, is satisfied that it
is „absolutely clear‟ that the allegedly unlawful activity
cannot reasonably be expected to recur.”

Already, 133 S.Ct. at

729.
The breadth of HOI‟s covenant not to sue does not suffice
to meet the burden imposed by the voluntary cessation test.

In

Already, the Supreme Court concluded that “given the breadth of
the covenant [Nike‟s enforcement of its trademark] cannot
reasonably be expected to recur.”

133 S.Ct. at 732.

Factors

that supported this conclusion included: (1) the covenant was
unconditional and irrevocable; (2) it prohibited Nike from
making any claim or any demand; (3) it reached beyond Already to
protect Already‟s distributors and customers; and (4) it covered
past and current designs as well as any colorable imitations.
See id. at 728.

By comparison, HOI‟s covenant not to sue is

more limited in scope than Nike‟s covenant, i.e., it only covers

3

HOI contends that the burden is on TN to show subject matter jurisdiction
for its declaratory judgment counterclaims. However, in each of the cases
HOI cites for support, the party claiming declaratory judgment jurisdiction
was the plaintiff, not the defendant asserting a counterclaim in response to
the plaintiff‟s claim of patent infringement.

12

“products currently manufactured and sold by TouchNet.”
Reply, Doc. No. 85, at 5.)

(HOI‟s

In fact, contrary to HOI‟s

assertion, HOI‟s covenant is more limited in scope than the
covenant in Super Sack Mfg. Corp. v. Chase Packaging Corp., 57
F.3d 1054 (Fed. Cir. 1995), abrogated on other grounds by
MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007), because
Super Sack‟s covenant not to sue covered “Chase‟s bulk bags
previously or currently manufactured or sold by Chase.”
1057.

Id. at

While the covenant language HOI has quoted from Super

Sack4 does not reference past products, it is clear based on the
entire opinion that Super Sack‟s covenant covered both past and
present products.

See 57 F.3d at 1059 (“Because Chase can have

no reasonable apprehension that it will face an infringement
suit . . . with respect to past and present products, it fails
to satisfy the first part of our two-part test of
justiciability.”).
In addition, HOI‟s covenant also does not extend to future
sales of TN products that were previously sold.

See Revolution

Eyewear, Inc., 556 F.3d at 1297 (holding that the covenant not
to sue did not divest subject matter jurisdiction because the
covenant did not extend to future sales of the same product as
was previously sold).

TN has represented that it “offered

4

“Super Sack will unconditionally agree not to sue Chase for infringement as
to any claim of the patents-in-suit based upon the products currently
manufactured and sold by Chase.” (HOI‟s Mem., Doc. No. 82-1, at 9.)

13

certain products for sale that were never sold; those products
were thus clearly not „manufactured and sold‟ when Plaintiff
purportedly gave its [covenant not to sue] to TouchNet.”
Opposition (“TN‟s Opp.”), Doc. No. 84, at 10.)

(TN‟s

TN further has

represented that “[o]nce the cloud of uncertainty caused by this
litigation is removed, TouchNet is prepared to resume selling
those products.”

(Id.)

While HOI has not represented whether

it intends to pursue an infringement claim against TN should TN
resume selling those products or whether it intends to pursue an
infringement claim against TN for past products, HOI‟s silence
concerning its anticipated future activities means that it is
not “absolutely clear” that it “could not reasonably be expected
to resume its enforcement efforts” against TN.

Already, 133

S.Ct. at 727 (internal quotation marks omitted).
HOI has not demonstrated that its covenant is of sufficient
breadth and force that TN can have no reasonable anticipation of
a future patent infringement claim from HOI.

Therefore, HOI‟s

motion to dismiss TN‟s declaratory judgment counterclaims
(Counts IV, V, and VI) under Rule 12(b)(1) is being denied.
C. Motion for Leave to Amend Answer to TN’s Remaining
Counterclaims
TN contends that “it would constitute undue delay and
impose prejudice upon TouchNet for Plaintiff to now add claims
to this case.”

(TN‟s Opp., Doc. No. 84, at 20.)

14

With respect

to undue delay, HOI has represented that it seeks to “amend its
answer to add requests for declaratory judgments for each of
TN‟s remaining counterclaims that the allegations of each are
not true” “[b]ecause of TN‟s representations . . . and TN
stubbornly maintains its remaining patent misuse counterclaims
(Counts I-III and VII-VIII) despite HOI‟s covenant not to sue
and withdrawal of its claim.”
9.)

(HOI‟s Mem., Doc. No. 82-1, at

It appears that HOI‟s request for leave to amend is

motivated by TN‟s actions in 2013.

Thus, it cannot be said that

there was undue delay.
With respect to prejudice, “practically no discovery has
occurred in this case” (HOI‟s Reply, Doc. No. 85, at 10), and it
appears that neither party has taken significant steps toward
developing its case such that granting HOI leave to amend would
impose prejudice on TN.

Therefore, HOI‟s motion for leave to

amend its answer “to include requests for declaratory judgments
that the allegations of [Counts I-III and VII-VIII] are false”
(HOI‟s Renewed Motion to Dismiss, Doc. No. 82, at 1) and to add
a request for its attorney‟s fees is being granted.
IV.

CONCLUSION
Accordingly, HOI‟s Renewed Motion to Dismiss Its Complaint

and Defendant‟s Declaratory Judgment Counterclaims, and for
Leave to Amend Its Answer to Remaining Counterclaims (Doc. No.
82) is being GRANTED in part and DENIED in part.
15

HOI‟s

Complaint is hereby dismissed without prejudice under Rule
41(a)(2).

HOI‟s motion to dismiss TN‟s declaratory judgment

counterclaims (Counts IV-VI) is denied.

HOI shall file an

amended answer to include a request for declaratory judgments
that the allegations of Counts I-III and VII-VIII are false and
a request for attorney‟s fees within 21 days.
It is so ordered.
Signed this 26th day of September 2014, at Hartford,
Connecticut.

/s/
Alvin W. Thompson
United States District Judge

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